Ladies and gentlemen, good morning. Welcome to the UBS Second Quarter 2012 Results Conference Call. I'm Stephanie, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to UBS. Please go ahead.

Caroline Stewart

Good morning, and welcome to our second quarter results presentation. This morning, our CEO, Sergio Ermotti, will present the highlights of the results, and then our CFO, Tom Naratil, will present the results in detail.

After our presentation, we'd be very happy to take your questions. And first of all, we'd like to take questions from the telephone and then from the audience here in Zurich. Before I hand over to Sergio, I'd like to draw your attention to our cautionary statement with regard to forward-looking statements, and I suggest you read it carefully. With that, I'd like to hand over to Sergio.

Sergio P. Ermotti

Good morning, everyone. It's almost 9 months since we announced our strategy, which is centered on our Wealth Management businesses and our universal bank in Switzerland. Our strategy builds on the strength of all our businesses, including our diversified asset management business and a more focused and less capital intensive Investment Bank and is supported by our industry-leading capital position.

The current environment is significantly more challenging than what we could have been predicted at the time of our Investor Day last year. Despite this, the second quarter continued to be a foundation of the long-term sustainable success strategy and growth for UBS. We have proven that while we are executing our strategy, we are also successfully delivering to our clients.

We have consistently executed on reducing risk-weighted assets, building our capital and driving further cost efficiencies. At the same time, we have recaptured market share, and we are delivering results in a number of key areas across the bank. For the second quarter, we reported a pretax profit of CHF 951 million and a net profit attributable to shareholders of CHF 425 million.

We achieved these results even as markets continue to be affected by ongoing economic and political challenges around the world, which increased volatility and caused many clients to demonstrate even greater caution than in recent quarters.

In spite of these challenges, we reported record profits in Wealth Management Americas and a very solid performance from our Retail & Corporate business in Switzerland despite persistently low interest rates. Net new money inflows in our Wealth Management businesses were strong. In fact, they are at the highest levels we have seen in any second quarter in the last 5 years.

We were pleased to see a notable recovery in third-party inflows in Global Asset Management, and we continue to see a high level of deposit inflows across the group. We were also honored to be voted Best Bank in Switzerland and Best Global Wealth Manager by Euromoney. This underlines the turnaround we have delivered in these businesses, our commitment to clients and their appreciation of our strategy.

In the Investment Bank, we also showed resilience in many areas, particularly in FX, equity capital markets and also in prime brokerage.

I am very disappointed to report a loss in Investment Bank. Despite the challenges and one-off this quarter, our ability to deliver on our capital and cost targets was not hampered. At the end of the second quarter, our Basel III risk-weighted assets stood at CHF 305 billion, nearly CHF 100 billion lower than at the end of the third quarter of last year.

We have therefore achieved and exceeded our 2012 targets, and we have now set our sights on achieving our new 2013 target of CHF 270 billion. This lower target reflects our assessment that the Investment Bank can perform within the target ranges we have set last year with risk-weighted assets of less than CHF 135 billion.

On capital, we also had another successful quarter. At the end of the quarter, our Basel III common equity tier 1 ratio, measured on a phase-in basis, stood at 13.1%, in line with our target. Over the past year, we have also increased our tangible book value per share by 18%.

As you know, we are committed to carefully managing all our financial resources. We maintain our sound funding and liquidity position, and we reduced costs further. During these uncertain times, our financial strength and the sound advice we deliver to clients provides particular piece of mind. It's clear to me that this strategy is working, and this is why we are fully committed to it.

I firmly believe that a strong capital base is the foundation for the long-term success, not only of this bank but for the industry as a whole. It is my #1 priority, and that is why I have such strong views on transparency. We have consistently and unambiguously disclosed our capital position in a way that is unmatched. Today, many banks are claiming the title of best capitalized bank. But we provide all the necessary facts to judge us, and it appears that our client recognize this. And we believe the markets agree that in fact, our capital position is industry leading.

As you know, Swiss regulatory standards are the highest in the world, and we have achieved and exceeded the 10% common equity capital minimum they have set. Our own target of 13% common equity capital is the highest in the industry, and on a phase-in basis, we are -- we have achieved this important milestone ahead of our plans.

We will continue with our regular issuance program to build loss-absorbing debt up to the 6% level required by our regulators. Our capital base is the strongest it has ever been, and we are determined to strengthening it further without diluting shareholders. By the end of the year, we expect our common equity tier 1 ratio, on a fully applied basis, to be comfortably above 9%.

On costs, we continue to make a good progress. Annualized cost has been reduced by CHF 1.1 billion compared to the first half of 2011 even though the strengthening of the dollar added around CHF 200 million to our cost base. Most of the reduction reflect lower personnel expenses as we have reduced headcount across the group, mostly in the Investment Bank, where headcount was just below the 16,500 target we set for the end of 2013.

We are well on track to achieve the CHF 2 billion cost savings target we set for 2013. Cost efficiency will continue to be one of my top priorities also in the near term. With respect to our mid- to long-term ambitions, we are adapting our business model, and we are working on making changes to our structural cost base to drive further efficiency and improve effectiveness across the group. These changes will take time, but our objective is to create an even stronger buffer to weather difficult markets and to deliver stronger performance when conditions improve.

Despite challenging market conditions, we are pleased with the progress we have made in a number of areas in our Wealth Management businesses. Invested assets increased by CHF 40 billion in the quarter, with over CHF 13 billion from net new money inflows. We continue to see strong performance in the largest and fastest growing markets, the America, Asia Pacific and the emerging markets. Total pretax profit for our Wealth Management businesses was almost CHF 700 million, with Wealth Management Americas posting another record quarter.

However, both Wealth Management businesses were affected by particularly low trading revenues. This quarter, our gross margin in Wealth Management was 89 basis points, which is outside our targeted range. Today, our clients are paralyzed by the fear of losing their wealth in these volatile markets. As a result, they continue to increase their allocation to cash and other save assets. At the quarter end, outside of mandates we manage on behalf of our clients, over 30% of our invested assets were in cash or similar products.

In times like this, our best investment is in the relationships we have with our clients and advice we provide to them. This commitment is essential to build sustainable long-term performance both for our clients and our shareholders, and we believe we will be rewarded when market conditions improve.

Let me explain to you why. To bring our margins back to the lower end of our range, we only need to see a modest increase in clients' risk appetite, from paralysis to conservative. The activity levels we saw in March this year are a clear example, when we saw margins up 96 basis points, and this was not an exuberant market. In our view, a return of confidence can only happen when client believe there is a clear and lasting resolution to today's economic and political challenges, and this will take time.

The next step is a return to asset price stability and then appreciation, which will encourage our clients to return to market and reinvest excess cash in stocks, bonds and mandates. At that point, our initiatives on lending, pricing and mandates are likely to be much more effective. And clearly, in the medium to long run, an increase in interest rates will also benefit our margins.

While -- before I hand over to Tom, I would like to go through briefly our achievements. Our disciplined risk-weighted asset reduction across the group continues. We have achieved our 2012 targets, and we are now working towards our new 2013 goals. Our capital base is the strongest it has ever been, and we are determined to build it further.

We have not been complacent on cost, and we are taking further action both in the short and medium to long term to reshape our business and improve efficiency. During these uncertain times, our financial strength and the sound advice we deliver to clients provides particular piece of mind. Our strategy to focus on our clients and leveraging our capital and financial strength is working. I believe the net new money and deposit inflows we have seen this year are further evidence to this. We are committed to our strategy, and I have every confidence in our ability to continue to execute it in the future.

Now let me hand it over to Tom Naratil.

Thomas Naratil

Thanks, Sergio, and good morning, everyone. It's my pleasure to take you through the details of our results for the second quarter of 2012.

During the quarter, markets continued to be affected by ongoing economic and political issues around the globe, particularly in Europe, which put pressure on equity market performance and caused volatility to increase. The U.S. dollar and British pound both appreciated against the franc in the quarter. This benefited our revenues in several businesses while simultaneously inflating our cost base. It also increased our risk-weighted assets. However, it benefited our equity as we recorded nearly CHF 1 billion of foreign currency translation gains in OCI.

Our adjusted pretax profit of CHF 637 million excludes gain -- own credit gains on fair value liabilities of CHF 239 million, restructuring charges and the credit related to the U.S. retiree benefit plan. The results shown here have not been adjusted to exclude a loss related to the Facebook IPO.

We recorded a net tax expense of CHF 253 million. The effective tax rate was 27%, which led to a rate of 32% for the first half of the year. The full year effective tax rate may differ significantly depending on several factors, including the results of our annual business planning process and its associated revaluation of deferred tax assets.

In line with our guidance last quarter, profits attributable to noncontrolling interests were CHF 273 million. For the second half, we do not expect material additional attribution of profits to noncontrolling interests. In Wealth Management, net new money inflows for the quarter were strong at CHF 9.5 billion, CHF 2.8 billion higher than the previous quarter. We see this as a sign that clients have a preference for well-capitalized banks as the guardians of their assets.

As Sergio mentioned, the performance of this business was affected by our clients' exceptionally low risk appetite. Our pretax profit was just over CHF 500 million. We recorded lower revenues on significantly lower trading volumes and a moderate increase in expenses, reflecting higher G&A costs, which were partially offset by lower variable compensation expenses. The challenging market conditions have not affected our focus on our strategic growth areas, and we've continue to hire client advisors in APAC and the emerging markets. However, our net client advisor headcount decreased slightly as we continued to trim underperforming advisor ranks, and we reclassified some staff out of the CA population.

Gross margin fell 4 basis points to 89 basis points, mostly due to lower trading and transaction-based revenues. Client activity sharply dropped between March and April, causing our gross margin to fall by 8 basis points, and both remained unusually low throughout the quarter. This is evidenced by trading and transaction-based fees, which drove most of the decline.

For Wealth Management, net new money inflows of CHF 9.5 billion reflect an annualized growth rate of 4.9%, which is at the top end of our target range. We continue to attract strong inflows from our strategic growth areas as well as from Switzerland, while outflows from our European business slowed. We're well positioned for growth in the most attractive markets, and we're confident that our positioning will continue to strengthen as the investments we make in relationships today translate into long-term business opportunities in the future.

Wealth Management Americas reported another record pretax profit of $211 million. This result was achieved on record revenues mainly resulting from improved managed account fees on increased divested assets as well as higher realized gains from the available-for-sale portfolio.

Net new money inflows stood at $3.8 billion, which included approximately $1.8 billion in seasonal outflows related to client tax payments. This is the best result for a second quarter since 2007. Including dividends and interest, net new money remains strong at $9 billion. Once again, we reported the highest invested assets per advisor in our peer group, and we're pleased with FA productivity, which continues to be strong.

Lending balances increased approximately $1.5 billion, driven by growth in credit lines and mortgages to high net worth and ultra high net worth clients. By focusing on our clients' needs and service quality, we've doubled our mortgage balances, and we've successfully grown credit lines by 12% to nearly $20 billion over the past year.

The Investment Bank recorded an adjusted pretax loss of CHF 178 million, as revenues were impacted by lower client activity and reduced volumes in tough market conditions. The results also included a loss of CHF 349 million related to the Facebook IPO as well as net losses of CHF 23 million due to changes in own credit methodology, with a CHF 65 million loss record in equities offset by a gain of CHF 42 million in FICC.

As we said at our Investor Day, 2012 is a year of transition for the Investment Bank as its immediate priority is RWA reduction. We've been willing to sacrifice some revenue to achieve these reductions early, and these actions better position us to achieve our targets for 2013 and onwards.

Despite the challenging environment, we continue to successfully execute on this strategic priority. We've already reached our Investor Day target for this year, and we'll now focus on our adjusted 2013 target of CHF 135 billion.

We're also pleased with the resilient performance in a number of our important businesses, including foreign exchange, equity capital markets and Prime Services. The Investment Bank continued to be vigilant on costs, and adjusted expenses fell 9%, driven mainly by lower personnel expenses. Our capital markets businesses had a resilient performance in an otherwise light quarter for the industry. In equity capital markets, revenues remained stable due to our participation in a number of private and structured transactions in close collaboration with our advisory team. These included our placement of Formula 1, which was made possible through the partnership of the Investment Bank with Wealth Management in APAC.

During the quarter, we participated in 9 of the top 20 equity transactions and 3 of the top 5 IPOs. Revenues in debt capital markets and leveraged finance declined to $206 million, slightly less than reduction experienced by the market as a whole. This quarter, we participated in 13 of the top 20 DCM deals, and our performance in global syndicated finance improved on a relative basis.

Advisory revenues declined in a continuing thin market for M&A. While Dealogic data indicates we've lost market share in aggregate, we don't believe this is the only measure for our business as it excludes derivative transactions, defense mandates and private deals, which are an important part of our strategy to deliver solutions to our clients.

We've outlined our strategy, which focuses on specific sectors and regions, and our success should be measured by results in these areas and not by league tables alone. In our chosen sectors, we saw strong performances in a number of areas. Our energy team in the Americas had a particularly good quarter, and we did very well in media and telecom. We were also successful in Asia x Japan, and we were the top bank for completed M&A in China for the first half of the year.

Looking ahead, we'll continue to focus our investments on certain sectors, such as real estate, utilities, global industrials and healthcare, particularly in the Americas. Also, we'll continue to build on the strong results of our strategic equity solutions group as we deliver innovative solutions to meet the needs of our private clients.

Our equities business had a challenging quarter due to lighter volumes and higher market volatility. Excluding losses related to the Facebook IPO and owned credit effects on trading revenues, our underlying performance was broadly in line with the market, and this quarter's result should not detract from the long-term success of this business.

Our clients continue to recognize this as we were named the #1 Pan-European equities house in the Extel survey for the ninth year running. Our ambitions for our equities business are higher than our performance this quarter, and we continue to attract and retain top industry talents who share our ambitions.

Our Prime Services business had another strong performance, with relatively stable revenues compared to the prior quarter. We won several key mandates in the first half of the year, both for new and existing funds, particularly in the Americas and Asia Pacific. In Europe, we received several notable accolades in industry surveys and awards, including achieving the #1 prime brokerage ranking in Extel survey. This momentum underlines our strong positioning across all regions, and we'll look to build on the success for the rest of this year.

Results in FICC overall were solid in the context of the market environment and were driven by client-focused businesses. At the same time, the business operated with very low levels of VaR while continuing to reduce overall Basel III RWAs. We're more efficient in utilization of risk than last year as revenues per unit of VaR more than doubled this quarter.

Our macro business performed well with a resilient performance in FX and slightly lower revenues in rates. Revenues in FX improved on increased volumes and higher volatility, and we're confident we're gaining market share primarily as a result of our investments in algorithmic trading.

Rates had a solid result despite the ongoing focus of tight utilization of resources and RWA reduction. Revenues in short-end rates improved, offsetting reductions in other businesses. Our credit business was primarily impacted by low client activity levels. The market was characterized by widening credit spreads and a reduction in liquidity. The impact of this was muted as we anticipated the challenging environment and started the quarter with low levels of inventory and risk usage that we maintained throughout the quarter.

All flow businesses were slow on the back of weak issuances. We focused on structured credit, which resulted in a good contribution. This also reflects our ability to maximize the value of our intellectual capital in a challenging trading environment.

Retail & Corporate delivered another strong performance this quarter despite the persistently low interest rates in Switzerland. Our efforts on cost control and pricing have helped to deliver an improved performance and offset a slight increase in credit loss expense. We're honored that Euromoney has named UBS as the best bank in Switzerland and to add that to our position as the best capitalized large bank in the country. Retail & Corporate is an important stable source of earnings for us and remains at the heart of UBS.

Our mortgage portfolio in Switzerland is well diversified against -- across all regions. We're growing this business selectively and adhere to very strict underwriting guidelines. We're also rigorous with regards to the valuation we assign to each property, which is based on the lowest of internal valuation, purchase price or third-party valuation. We feel very comfortable with our focus on risk management for this portfolio. For example, in a stress scenario in which property values drop 20%, over 99.7% of our total exposure to Swiss real estate would remain covered.

The Swiss economy remains robust despite external pressures. While Switzerland is a mature economy, its stability attracts skilled professionals and wealthy individuals from all over the world, and we believe this will continue to be a source of growth. While real estate prices have continued to increase in certain regions, at this time, we don't believe this could destabilize the Swiss economy or cause major losses for UBS. Delinquency ratios in our residential real estate portfolio have remained low in the past few years, and actual losses were below CHF 20 million in each of the last 7 years. We're committed to maintaining our high underwriting standards, and we'll continue to carefully monitor developments in the Swiss real estate market.

Corporate Center core functions reported a loss of CHF 19 million, while the legacy portfolio's result was a loss of CHF 119 million. Starting with this quarter, owned credit on fair value liabilities is reported as part of Corporate Center core functions and no longer within the Investment Bank and legacy portfolio. This reflects the fact that owned credit is a function of the group's credit fundamentals and volume of issuance and is not managed on a business division level. This is also in line with emerging industry practice.

The loss in the legacy portfolio was mostly due to the sale and liquidation of assets related to the settlement agreement with MBIA, which led to a reduction of Basel III RWAs of approximately CHF 14 billion. Partly offsetting this was a gain of CHF 45 million following the revaluation of our option to acquire the SNB StabFund's equity.

We continue to strengthen our industry-leading capital position in the quarter. On a Basel 2.5 basis, our tier 1 ratio improved 50 basis points to 19.2%. While RWAs slightly increased, the ratio benefited from a CHF 1.6 billion net increase in capital mainly due to lower deductions for securitization exposures on our legacy portfolio sales but also by net profits and foreign currency translation gains.

Improving our capital ratios on a Basel III basis remains one of our key priorities. We continued to make significant progress this quarter both on capital and RWAs.

I'd like to highlight some changes affecting the Basel III ratio this quarter, which had a positive effect of around 40 basis points on a fully applied basis and 20 on a phase-in basis. Starting with this quarter, rather than being treated as a low-rated securitization, the value of our option to buy the SNB StabFund's equity will be fully deducted from tier 1 capital. As a result, common equity tier 1 capital was reduced by CHF 1.8 billion and RWAs by CHF 23 billion.

The remaining adjustments had no impact on Basel III ratios overall but resulted in an allocation of CHF 11 billion of CVA VaR RWAs from the Investment Bank to the legacy portfolio. As these treatments were determined after we set our original RWA reduction plan, we've applied our capital discipline and lowered our group and Investment Bank targets as you can see on the next slide.

We continue to execute our RWA reduction strategy successfully, surpassing our year end 2012 goal. We finished the quarter with CHF 305 billion, and now, we're working towards the 2013 target. Excluding the allocation of CVA VaR RWAs as previously discussed, we've reduced RWAs in the Investment Bank by CHF 10 billion despite U.S. dollar headwinds. In the legacy portfolio, excluding this allocation and the change in treatment of the StabFund, we reduced RWAs by CHF 17 billion mostly as a result of sales and liquidations.

With a common equity tier 1 ratio of 13.1% on a phase-in basis, we're now above our 13% target. We also have an additional 60 basis points of Basel III-compliant low-trigger loss absorbing capital. We started issuing these instruments in the first quarter of this year, and we'll continue to do so as we work towards our 6% goal.

We've updated our illustrative example of Basel III capital ratio progression, displaying our future ratios, which are indicative based on certain assumptions which are detailed in the appendix. We attempted to be conservative relative to consensus forecasts, where we took a 25th percentile of earnings and applied a haircut of 20%.

Our reported second quarter fully applied Basel III CET 1 ratio stands at an industry leading 8.8%. Based on the assumptions in the example, our fully applied ratio would be well above 11% by the end of 2013. This also includes the estimated incremental impact of approximately 30 basis points we expect from changes in the accounting standard related to post-employment benefits known as IAS 19R, which will be effective as of January 1, 2013. We've included more details in the appendix.

Despite the challenging conditions we faced this quarter, we've once again proven our ability to execute our strategy and deliver to our clients. We've built our capital ratios significantly over the last 3 quarters, and they stand at industry-leading levels.

Our targets are also the highest in the industry. This capital strength is the foundation for the success of our strategy. In addition, our funding structure remains solid, and we continue to carry substantial excess liquidity. Our Basel III net stable funding ratio is already over 100%. We're already complying with Swiss and international short-term liquidity metrics with a Basel III estimated liquidity coverage ratio of around 100%.

Our focus on executing on our ambitions and capital targets strengthens our franchise and puts us in a strong position to deal with the challenging environment facing banks in the near future. This will give further confidence to our clients, investors and employees.

Thank you, and Sergio and I will now take your questions.

Question-and-Answer Session

Operator

First question from Mr. Hubert Lam, Morgan Stanley.

Hubert Lam - Morgan Stanley, Research Division

Three questions. First, on capital. Could you walk us through the changes to your full look through Basel III ratio for 2013 and why it appears 9 basis points lower than what you had at the Investor Day in November? Secondly, on LIBOR, I realize you may not be able to comment too much on it, but you could -- could you share what the implication of dollar LIBOR immunity could mean positively and negatively? Lastly, can you please give us some color as to how July trading has been both in Investment Bank and in terms of client activity in the Wealth Management business?

Sergio P. Ermotti

So Tom, please take the first question.

Thomas Naratil

Hubert, thanks for the questions, but could you repeat the first one? We had a little problem with the audio at the beginning.

Hubert Lam - Morgan Stanley, Research Division

Yes. Yes, no problem. The first one's on capital. I was wondering if you could walk us through the changes to your full look through Basel III ratio and why it appears about 90 basis points lower than what you had targeted at the Investor Day in November.

Thomas Naratil

Okay. Thanks for that question, Hubert. In both cases, both at Investor Day and in the presentation today, we've used an illustrative example using consensus forecasts for a number of items that include both the earnings and dividends. And so at Investor Day, we showed a number of approximately 12.2% for year end 2013. Based on higher dividend estimates as a result of our change in strategy, that causes a decline of about 60 basis points in the build over that time period; a lower earnings forecast caused a reduction of about 50 basis points; our change in treatment to RWAs on the SNB StabFund as well as the deferred tax assets I described earlier at 40 basis points. The impact of IAS 19R, which had not previously been included in this, is now fully included. That results in a reduction of 30 basis points, and then there are some other intangibles that add back another 10 basis points. So that walks you through the 90. And I just noted in the dividend difference, which is about 3/4 of the change, previous estimates over that time period for dividends prior to Investor Day were about CHF 0.5 billion and now, included an analysts' consensus are roughly CHF 2.3 billion in total dividends.

Sergio P. Ermotti

Yes. On question 2 on LIBOR, we have been clearly cooperating fully with the regulatory authorities in connection with these investigations. We have been granted conditional leniency and/or immunity by Competition Authority relating to each reference rate for which we found evidence of sufficient to support such a grant. So we have disclosed we have received conditional leniency or immunity on certain jurisdictions in respect of a yen LIBOR, Euroyen TIBOR and the Swiss franc. We continue to cooperate, and the investigation, we are waiting for responses. But the point to your question is that in order to get leniency, you need to have evidence to support it, and we haven't found any evidence in an extensive review of our documents. So that's the standing of the LIBOR. As you mentioned, it's difficult to make further comments on this topic without going into a collusion with the ongoing investigation. In respect of July and activity for Wealth Management and Investment Bank, as usual, we are not making comments. You can see from our outlook segment that I don't think that there is anything material that has changed from the beginning of this year. And of course, we have to take in consideration also the seasonality we are facing right now, but we are working with confidence on addressing the issue on how to counter-offense this issue by looking on cost, working on our long-term plans and giving confidence to our clients that when the situation improves, we are there to support their needs.

Operator

Next question from Mr. Jon Peace, Nomura.

Jon Peace - Nomura Securities Co. Ltd., Research Division

I've also got 3 questions, please. The first one is just on the Wealth Management gross margin and that 2- to 5-basis-point uplift you expect from specific management actions. I just wanted over what timeframe you anticipate those benefits might be accrued. The second question is on costs. Given your optimism on hitting those 2013 targets but given the ongoing difficult environment, do you think there's scope for extending those cost-cutting plans formally? And then finally, I just wondered what your outperformance on Basel III targets meant for the dividend. Obviously, your peer has indicated that once they're above a target level of capital, they plan to accelerate capital return. And I just wondered if you could expand on your thoughts on how your dividend might progress once you get to certain key capital ratios.

Thomas Naratil

Thanks for those questions, Jon. Sergio has asked me to take the first one. On the Wealth Management gross margin on the management actions, there are a number of things that we're working on, as you know. The introduction of our CIO office and the deployment of our Wealth Management research function is something that's particularly important. And it's one of the investments we're making now that I referred to in my comments, where the payoff doesn't occur in today's market. In a very troubled market, a lot of times, the advice that you're giving their clients -- your clients is holding their hand and actually talking to them about maintaining positions, which isn't something that's generating revenues in the short run but we believe is the best and most appropriate advice for them over the long term. Second, we also have a focus on a number of different pricing initiatives that we're working through. But I would expect that absent the market environment itself, the Wealth Management business is focused on executing those plans over the course of the next couple years with regards to the management actions that we've cited in the bill that Sergio went through.

Sergio P. Ermotti

Yes. On costs, clearly, we are focused on executing our CHF 2 billion cost reduction program, and -- but for sure, we are not resting there. We are adapting our cost base also on the short term to the new environment. You saw that we already achieved our targets for the Investment Bank of a headcount base below the 16,500 we announced in November. I think that there's still work to be done there to adapt our cost base in the Investment Bank to the new realities, and we think we can do it also while making selective investments in the areas where we think that we can reinforce our position or service our clients. So overall, I think that you can expect us to continue to work hard on managing this challenging market condition on the headcount and the cost base of the firm short term. Medium to long term, clearly, we want to work on the structural cost. And for sure, this is something that we will develop over the next few months and to try to take down cost further but in a way that make us also not only more efficient but also more effective in the way we operate. So it just takes a little bit of time, because it means really changing some organizational structures and flows on how we operate within the bank. But cost is clearly a must in terms of focus in this challenging environment. We need to further -- go further. On your question on what it means achieving our Basel III targets for dividend, we're -- I think that we are very consistent in our position there as we announced in November. Once we achieve our targets, we intend to implement a policy of returning capital to our shareholders in different forms. We will find out the best one by then. But for sure, we are -- we haven't changed our stance. We are accruing a dividend. We will make a determination about dividends at year end based on our results. And we will make a recommendation to the board, and we will see what is the best way. But once we achieve our targets, it's quite clear that we're going to have a very highly focused policy in returning capital to shareholders.

Operator

Next question from Mrs. Fiona Swaffield, RBC.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

I kind of have questions in 2 areas. One is on just the normal leverage ratio. I just wondered how you look at say your assets minus derivatives relative to your Basel III, because you still look quite levered on that basis. Is that something you look at? And the second question is just on equities. I think you said that you thought it was relatively in line with peers. Were you talking about cash or the total amount? Or was it because you're adjusting for currency? I was just a bit unsure.

Sergio P. Ermotti

Take the first one.

Thomas Naratil

So Fiona, on the leverage ratio and the way that we're viewing that, as we stated in our Investor Day, the first focus that we've had in terms of getting bring prepared for the Basel III environment has been to focus ourselves on risk-weighted asset reduction and building our capital base. One of the things that we've begun to factor into our next set of plans during our current 3-year planning process, which we have just started, is actually taking a closer look at the leverage ratio and how some of the requirements have become more clear. But that clearly is one of the -- if you thought that RWAs were a constraining factor on a business model, certainly, leverage ratio will be the next constraining factor to be considered.

Sergio P. Ermotti

On equities, I guess if you look at our performance and you take out the Facebook impact of CHF 349 million and around CHF 65 million of on-credit adjustments, you will find that our performance, compared to all competitors that just reported, it's pretty much in line. So clearly, in addition to that, we are, as you know, quite skewed in terms of market shares in Europe, and this is not very helpful in this environment. But despite that, I can say that year-on-year, when you extract out those 2 elements and also, by the way, the fact that we discontinued a lot of our proprietary activities, I think the result is pretty much in line if not even, in some cases, outperforming some of our peers. So I think that's -- for sure, when I look at that business, I have to be also quite clear that our ambitions are much higher than those results.

Operator

Next question is from Mr. Kinner Lakhani, Citi.

Kinner R. Lakhani - Citigroup Inc, Research Division

Yes. I have 3 questions, actually. So firstly, I just wanted to understand better the reallocation that you've done in terms of the Investment Bank RWAs to the legacy asset division. But also, more fundamentally, if one looks at your valued risk trends and fixed income versus your peer group over the last 5 or 6 quarters, it seems like they're turning down somewhat more aggressively than virtually all your peers, so just wanted to understand if you are potentially taking out more capital out of fixed income than your peers. Number two, just trying to understand your liquidity surplus, which has gone up again -- it's now 25%, I think, of your balance sheet, and how that kind of figures relative to, obviously, the Moody's review that was ongoing at that time and where you see it going forward. And thirdly, if you could also talk to the I think changes that you've implemented within your treasury division and whether that had any bearing in terms of the LIBOR issues.

Sergio P. Ermotti

Okay. Kinner, let me take the second question in terms of what we are doing in our FICC business. I think that totally coherent with our strategy, we are taking, clearly, a hard look into risk consumption and risk-weighted assets allocated. And the capital allocation to our FICC businesses, this is paying off. Clearly, as you look at -- we are focusing much more on client flows in structuring business with clients. We are taking down anything that we chose to do with proprietary elements or carry trades that are not necessarily driven by client business and trying to be more efficient. You can see, as we pointed out, that basically, we were able to manage a doubling of the revenues compared to the risk consumption when you look at year-on-year. So our strategy is working. I think that this is a strategy that is totally coherent, by the way, with a bank that believes that Basel III will be implemented. And therefore, it's something that we want to anticipate, and we are driving these changes forward. So it's totally aligned, and as a result of those massive risk-weighted assets reduction which are weighting for 50% in our capital allocation model, we will have a reduced capital allocation to both FICC and the Investment Bank. I'll let Tom take the other 2 questions.

Thomas Naratil

Okay, sure. So Kinner, on your question on the reallocation, I'll also add to Sergio's comment. First, our VaR has been coming down faster than our competitors, but I also think it's quite consistent with the outlook that we've had for the markets over the course of the past few quarters. Second, I would highlight that we have seen some real -- and if you look at Slide 34 in the appendix, our Investment Bank has done an exceptionally good job, in particular, in FICC, on reducing RWAs more quickly than we targeted, and these are real reductions that we see occurring through sales and restructurings. On the -- one comment where we specifically talked about an allocation change on the CVA VaR RWAs, when we created the legacy portfolio and shifted over the positions, we hadn't been -- we weren't comfortable with the allocation methodology we were looking at for the CVA VaR associated with things like the immunity derivatives portfolio. So we continue to carry the CVA VaR RWA charge in the Investment Bank. And this quarter, we perfected the allocation methodology, and we were comfortable allocating the CHF 11 billion from the IB into the legacy portfolio. One of the effects of that is since our view on the legacy portfolio is that we run it down to 0 is that those RWAs get extinguished rather than recycled, and that's why you see -- one of the reasons why you saw our targets coming down. And then we also had a remainder in the quarter immediately following our Investor Day, our fourth quarter results. We also had shifted about CHF 5 million in real assets to the legacy, and again, we were tuning up that adjustment. On your question about the liquidity portfolio, again, in a similar way to our views on fixed income VaR, clearly, our outlook statement affects our positioning of liquidity in this market. We substantially took up our liquidity positions in the third quarter as some of the issues in Europe started to heat up this third quarter of last year. And we've maintained them through -- we increased them again in the fourth quarter, and we've maintained it in the first and second quarters. You might be seeing some of the FX effects perhaps in some of the -- perhaps being reflected in some of the percentages that you sighted. Your last question was about the changes that we recently made in our treasury structure. When I moved into my position about a year ago, we had done a review on the overall setup in treasury, benchmarked ourselves to competitors. We presented effectively a one-year plan to the group ALCO that the group ALCO approved. And I think the last changes that you're probably referring to, that was the tail end of a -- of roughly a 12-month process, and it had nothing to do with anything related to LIBOR.

Operator

Next question from Mr. Derek De Vries, Bank of America Merrill Lynch.

Derek De Vries - BofA Merrill Lynch, Research Division

I think I have about 27 questions but sort of broadly grouped in 3 categories. Kind of to start with, the Basel III capital rules and I want to ask sort of the best capitalized bank a couple of questions about what changes could come. And specifically, I'm interested in what your estimate is for the change of capital in regards to the trading book as we move from a -- potentially move from a stressed VaR calculation to an expected shortfall calculation, which was the comment a paper recently published. And I'm also wondering if you can give us an estimate of the impact of changes from counter-party risk for trades done through clearinghouse. And then finally, on the Basel III, I know the Swiss are pushing ahead with Basel III. And -- but what odds do you put on it being implemented on the 1st of January 2013 by both the Europe and the U.S.? That's on capital, broadly. And then I just want to understand a statement Mr. Ermotti made earlier in regards to the LIBOR risk. I think I must have misheard or only heard part of it, but I think you specifically said that in looking through, you haven't found any evidence, and so I'm confused why all the paragraphs in your quarterly reports and whatnot if you haven't found any evidence. And I'm wondering if maybe you could elaborate on that statement. Did you mean to say you haven't found any evidence of management sort of understating? Or what did you mean by that statement? And related to litigation/fines, I was wondering, your U.S. GAAP peers are strongly encouraged to make an estimate of what the potential legal/litigation risk they face over and above what they provisioned. I was wondering if you'd be willing to make an estimate of what that range could be. And then my last question, I promise, if I look at the first half of the year, you guys have done about a 6% ROE, a 7.5% return on tangible. Given that's usually the seasonally strong part of the year and given your outlook statement is not for a recovery any time soon, I'm wondering when we could see a 12-month period where your ROE is above your cost of equity.

Sergio P. Ermotti

Okay. Let me tackle the part I understood of your questions in respect of being misheard. I think that's -- I was quite clear in saying that in order to obtain leniency or immunity, you have to find evidence sufficient to support this issue. So we haven't found any evidence to support this issue beyond the 3 reference rates that we disclosed: Euroyen TIBOR, yen LIBOR and the Swiss franc. So that's...

Derek De Vries - BofA Merrill Lynch, Research Division

I understand. I did mishear. I do apologize. I got it.

Sergio P. Ermotti

Okay. So in terms of -- it's the famous $64,000 question, your question on Basel III environment. I mean, when you look at the impact of -- on changing methodology for trading books, it's still up in the air. It's gone through a consultation. We are contributing to these discussions. We will see what is the impact. And of course, we all recognize that all things being equal, everybody will be impacted. And there is an industry-wide consequence, and we will adapt our business model if there is a severe consequence with that.

Derek De Vries - BofA Merrill Lynch, Research Division

The key assumption there is everything being equal, and I don't think anyone thinks that everything is equal. So I guess if you could elaborate on that point?

Sergio P. Ermotti

Well, everything being equal what? I mean, everything being equal today, we don't change our business model. Everything being equal there is a disproportionate allocation of capital in certain activity, we will need to assess how this capital allocation is resulting in an economic profit shortfall that may not justify any longer being in certain businesses, or we may need to stay in certain businesses just to support a service we want to give to clients. But making assumptions right now without having a clear concept and clear specificity on what's going to happen is very, very difficult. So as you mentioned, we are prepared -- from January 1, we will work on a basis of Basel III, fully applied, and that's our modus operandi. And as I said, we will adapt our business model if there are major changes. In respect of our return on equity, year-to-date, of course, they are not what we want to see for our shareholders going forward. 2012 is a transition year for the Investment Bank. We made it very clear. And Tom also reminded everybody that as we change the business model in Investment Bank, we are sacrificing revenues opportunity to accrue capital, because capital is one of the pillar, with -- together with a sound cost base, for our future. When we achieve our targets and the new model is in place, we think that with normal market condition, we will be able to achieve a 12% to 17% pretax return on equity for the Investment Bank. And we confirm that we believe that over the cycle, we will be able to have a 12% to 17% full return on equity for our shareholders. So that one clearly is still available, but we need, as I -- as we mentioned before, both on the wholesale and the institutional side of the equation and on Wealth Management, we need people to get out of the paralysis and just moving to a more conservative risk attitude. Otherwise, I think that clearly, this achievement of our targets will take longer than we anticipated. But at this stage, the situation is still very open. I don't see -- we don't see how the tensions that we are seeing right now in Europe and also potentially, in the U.S., with the election year is coming and also the lack of a strong growth in Asia are very promising. But as we mentioned before, we're going to tackle it with cost initiatives and try to manage in the meantime.

Thomas Naratil

All right. Thanks, Derek. I think Sergio covered probably about 2/3 of the questions you asked. If I go to the first 2 that you asked, you had some questions about stressed VaR versus expected shortfall method. We don't have an estimate currently for that. And then on the counter-party risk, there are still some things developing there, so I also don't have anything additional for you there. I would just add to Sergio's comments on our views on the plans we laid out at Investor Day and what we're doing in this current year's business planning process. We know the targets that we've set. Those are the targets that we, as a management team, aim to achieve. And there, obviously, as we go through that planning process, we'll have to take a look at cost base resource utilization as well as a number of other items and then we'll make those adjustments to the plan. But I certainly think our strategy is one that's quite durable regardless of the market environment, and I think we've been able to show that over the course of the past 3 quarters.

Operator

Next question from Mr. Kian Abouhossein from JP Morgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Yes, a few questions. The first one is coming back to the IB. You mentioned ROE pretax 12% to 17%. Looking at your investor slides in New York, you said you would achieve 12% to 17% pretax target as of beginning of 2013. I'm just reading it and note for Page 18. Please let me know how you get to this target. You have achieved your staff numbers, your cost savings. So your cost number target is roughly in line on the IB, but you're well below this target. So should we just ignore this for 2013? Will there be further actions to be taken in 2013? And lastly, in that respect, what do you understand as normalized in terms of normal revenues? The second question is related to the margin story on top line margin, Page 6 of your presentation. You referred to normalized margin environment. Again, I would like to know what the 5 to 8 basis points mean normalized of interest rate and asset allocation. And the third point is related to Page 26. Out of the CHF 30 billion, how much of that is actually on this slide, on the right-hand side? It looks to me that more or less, the CHF 30 billion are not real asset reductions or not real kind of risk reductions, but they're more accounting-related issues that I see on this slide. Please correct me if I'm incorrect.

Sergio P. Ermotti

Kian, on -- as you pointed out, yes, we do confirm our ambition and our target to be at 12% to 17% pretax return on equity for the IB. But if you remember, back in November of last year, I don't think that either a pessimistic outlook for the next 12 months would tell you what we are living in right now, so the environment has completely changed. Having said that, if you look at our first quarter results, we were not far away from that goal. So again, I think that in order to achieve those targets, we need a normalized market environment, not a very exuberant one. We just need a normal market environment. Of course, we have been very proactive in accelerating taking down cost as we saw the new environment developing. And we will not be shy to continue to do so as we see the market changing as I do believe many of our competitors will have to do. So I don't think that we are -- you should not ignore that target, because this is our ambition at group level and at the Investment Bank level. And we do believe that in the new paradigm, it is possible, with less capital, to achieve those returns. In terms of slide on the Wealth Management side, I think that when we talk about the first 6 basis points, the one that brings us into the 90 -- the 95, as I mentioned before, really, the best example, look at what happened in the first quarter. In the first 2 months of the quarter, we're at around 90 to 91 basis points return on assets, and then it took 3 to 4 weeks of just a little bit more risk appetite overall by clients to get into the 96. So absolutely, the ability to respond and to close that gap is totally depending on risk appetite. Our cash and liquidity level, our clients' cash and liquidity levels, is at very high levels, all-time high. We make very little revenues out of net interest income nowadays, so it takes a little bit of risk appetite to go back into equities and bonds and mandates to bring back into our minimum range. The second effect is like a self-fulfilling one. As risk appetite and risk -- and the assets prices normalize, you will see the effect of having more leverage into -- of our clients, loans and mandates to also be an additional buffer, and last but not least, this is much more long-term interest rates. So again, I don't think it takes so much to get closer or at our lower part of the range, but we need clients. And we fully understand clients. We are advising clients to be prudent right now. And -- but when time comes to be a little bit more proactive, we will for sure see the results.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Before we go on to the risk-weighted asset question, can I just follow up on this? What happens if this is a new environment on revenues for the IB industry? What action -- at what point do we expect UBS to take further action to make a return for shareholders? Let's assume the environment doesn't change.

Sergio P. Ermotti

Absolutely. We're always going to take actions for our shareholders, and we're going to adapt. We said it very clearly. We enter into a journey of transforming and adapting our Investment Bank to 2 issues. First of all, we wanted to have -- back in November, we said we wanted to have less capital allocated to the Investment Bank no matter what. The second one was an industry outlook, a clear understanding that in the new regulatory environment, particularly with Basel III, the investment banking industry will change, and therefore, we wanted to anticipate those changes. We will be on the front of those changes. We will take proactive measures to adapt the business model of the Investment Bank. So at the end of the day, we will just be there. Where we want to compete, we will compete. We want to give our clients the best service possible, both to corporate and institutional clients and our Wealth Management clients. We will adapt that business model to the new environment. And I frankly believe that the Investment Bank industry, as we stand right now, is likely to look like more a mid-'90s -- the mid-'90s environment than what we saw in the last 10 to 12 years. Therefore, we will need to adapt to this new environment. And I do believe that every bank that is subject to Basel III will need to do the same, and therefore, we will be in good company.

Thomas Naratil

Kian, on your questions on Slide 26, the first comment I'd make is regardless of whether the RWAs are going down because of sales or not, we obviously don't have to carry capital or issuing loss-absorbing capital against them if we reduce that as part of our overall target reduction. I think if you look at the bottom portion of the slide, all the adjustments and the allocation shifts that we've made between the Investment Bank and the legacy move us from RWAs that could be recycled and used to RWAs that are completely reduced via extinguishing risk positions. The top 2 items on that slide, the SNB StabFund change in treatment as well as the deferred tax asset treatment, which is actually an increase, the net of that is the CHF 15 billion. So the total is CHF 30 billion by the end of 2016, CHF 15 billion of which is complete reduction of risk via sales. And then in the case of the other piece, you could call that an adjustment to methodology, but nevertheless, it does reduce our -- the amount of capital we have to put up and obviously, the cost of carrying loss-absorbing capital as well. I'd also just make a supplemental comment to Sergio's remarks on the RoaE target in the Investment Bank. I'd also -- and this goes a little bit back to Fiona's question earlier. If you think about our equity attribution methodology, we have a multifactor model which includes RWAs, risk-based capital as well as a leverage ratio component. And so once we've -- that's why I mentioned before, when you get to the constraining factors at a certain level of RWAs, the constraining factor on producing the targets that we'd like to achieve requires us to take a look at some of those other components.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Okay. And if I can, one more quick one. Legacy assets in the Corporate Center, you reduced and had -- there were some charges. Are we getting to a point where you're going to reduce legacy assets continuously, but at this point, it might be that you have continued charges going forward and in the Corporate Center due to the reductions?

Thomas Naratil

As you know, this quarter, we did incur losses on disposing of the positions or -- either through sales or at liquidations. Actually, on the sales, there were losses; liquidations, there were gains of certain of the structures. We're still ahead of our target versus the budget losses we had for risk reduction in the legacy portfolio. However, we certainly would say that we think the experience that we've had so far has been quite good. The performance of the team has been good. But we might be entering a time period where certainly, we saw in the first quarter, which was some gains from disposals might be something that we'd be less likely to see in the future.

Operator

Next question is from Christopher Wheeler, Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

A few questions. First of all, obviously, a very good Wealth Management net new money figure of CHF 9.6 billion -- CHF 9.5 billion. Could you perhaps -- just perhaps explain where that went? It appears to me you got an 8% increase in your loan book and something like a 5% increase in deposits. Is that really where the money went? Or perhaps you'd explain that 8% increase in loans. Is that predominantly Lombard loans? I assume a lot of that is. That's the first question. The second question, Slide 27, the CHF 21 billion reduction in IB RWA, I don't know if, Tom, you've got a view as to what the underlying assets were of those RWAs that were disposed of. Third question is just on IB cost. It's an old chestnut, I'm afraid. But obviously, revenue is down 41%; personnel expenses, down 27%. It looks like that kind of billion number is kind of the rock bottom number at the moment for personnel. I just wondered if you'd sort of could give us a feel for that, because it's listed in the fourth quarter. And then finally, Sergio made a comment on the dividend. Obviously, it all makes good sense in terms of increasing paybacks to shareholders once you're at your 13%. But in the likes of what we saw in the SNB -- and I know you were irritated by that. But just in terms of what might happen in terms of the token payment you made last year, should we just expect that to continue through until you get to the 13%? Or do you have ambitions that perhaps go a little bit beyond that?

Sergio P. Ermotti

I'll take -- Christopher, I'll take the last one first. I don't think we were irritated at all by the SNB report. I think that's -- the reality is that if we achieve our capital targets that have been set by regulators, I do think that we will be able to demonstrate our ability to implement a return of capital to shareholders like we announced. So I think that the numbers we have been showing you today are a demonstration that we are getting close to our targets. We are making very good progress. And therefore, I don't see why our ability to have our dividend policies that I just outlined would be hampered, so we maintain our confidence.

Christopher Wheeler - Mediobanca Securities, Research Division

But just, I mean you -- when you obviously reinstated dividend last November, there was a degree of excitement. And I just sense now that that token payment will bump along until you get, in a couple of years' time, to your chosen target ratio. Is that fair?

Sergio P. Ermotti

No. I never told you to be excited, but I think you can expect a continuous improvement of our dividend policy alongside with our progress in the capital accretion and our results, so...

Thomas Naratil

Okay. So Chris, going back to some of your earlier questions on -- as you know, it was a very good net new money quarter for Wealth Management. I think consistent with what we've seen from clients and also, new clients as they move to a point of refuge in a turbulent market environment, and that's certainly the way they're viewing UBS as a port of safety, more of that money is being very conservatively positioned. So as a result, we saw the greatest amount of upticks in cash or cash equivalent items relative to that net new money. In terms of the RWA reduction, we'd have to get back to you for the things prior to the second quarter. We do have -- if you go to Slide 34 in the appendix, we have the layout for the second quarter in the Investment Bank, the reduction from CHF 191 billion to CHF 170 billion in RWAs. CHF 11 billion is the allocation to the legacy portfolio of the CVA VaR. We had about CHF 15 billion through real reductions in OTC derivative exposure. We had an uptick in market risk of about CHF 3 billion and some other intangibles primarily related to FX and increased the value of the dollar in the quarter, but we could take you back through a walk on a call following this.

Christopher Wheeler - Mediobanca Securities, Research Division

And in terms -- so in terms of the 8% increase in loans in Wealth Management, what was that -- was that money some hard loans in Asia?

Thomas Naratil

Yes, it's all Lombard. Geographically, more of it would be in Asia. That's correct.

Christopher Wheeler - Mediobanca Securities, Research Division

Okay. And on personnel costs in...

Thomas Naratil

So it would probably be about 60% -- probably about 60% would be APAC. And then your question on personnel cost and the IB, could you just repeat? I didn't get that one.

Christopher Wheeler - Mediobanca Securities, Research Division

Yes. It's just that revenues were down 41% and personnel cost down 27%. And it feels to me that billion of personnel cost looks like the sort of the bottom line for you in terms of how much further you can push that on a quarterly basis given it was similar to Q4. Is that a fair assumption?

Thomas Naratil

I think what we'll have to do, Chris, in particular, as we're looking at this business planning process, obviously, as we mentioned, as Sergio mentioned in his remarks, the conditions for the market environment and the outlook over the course of the next couple years is a different one than we foresaw at Investor Day. And so as a result, we'll have to take a look at -- and if you think about constraints on a model of running an Investment Bank, you have constraints on certain resources, and those constraints are RWAs, balance sheet and costs. And we have to figure out how to run that model by optimizing the output to phase with those constrained variables, and that's what we'll work on in this business planning process.

Operator

Next question from Mr. Andrew Lim, Espirito Santo Bank.

Andrew Lim - Espirito Santo Investment Bank, Research Division

I was just wondering if you could just elaborate on your change in treatment of sort of DTAs. Obviously, some CHF 1.5 billion was for DTAs on their operating losses, which have now been transferred to temper your differences. I was wondering if you could give more color on how do you achieve that and what capacity there is for further such changes in treatment. And then just a more general question about the SNB and its euro, sort of see, tech [ph]. Obviously, they've built up a lot of euro reserve, but I was just wondering if you could share your thoughts maybe on -- or what happened to those reserves in the euro breakup scenario? What would be the wider implications of that?

Sergio P. Ermotti

Well, let me take the last question. I think that it would be inappropriate for me to make a comment on the SNB reserves. And I think that the only thing I can say is that clearly, this intervention has helped to stabilize the Swiss economy and to give it an opportunity to change and adapt to the new environment. For sure, we are looking to the -- forward to see more from the SNB reports. I think they published this morning, so I think that it's not appropriate for us to take any position on this. But Tom, why don't you take the first question?

Thomas Naratil

Sure. Andrew, thanks for that question. On the DTA reallocation from 100% of our DTAs being allocated to net operating losses, we shifted roughly about 50% of that balance to the temporary differences amount. Those temporary difference amounts are the amounts that we would expect that would be reversed during the 5-year DTA valuation horizon. So in answer to your question, we believe that we've done the appropriate allocation for our view on the valuation time period, which is the next 5 years, and we wouldn't expect a further reallocation to temporary differences.

Operator

The last question from the phone is from Mrs. Yasmin Osman from Handelsblatt.

Yasmin Osman

I do have 2 questions on the LIBOR. First one, I maybe hadn't understood it before, but have you made any change in your organization to prevent manipulations of the LIBOR rate in the future? And then there are a lot of people demanding refunds on the LIBOR. So do you have any proposals how manipulations could be prevented in the future? And to the debate of the separation of Investment Banking and the rest of the banking business, do you believe that we will see a sort of a class legal act in Switzerland or in Europe?

Sergio P. Ermotti

Look, I think on the LIBOR case, we told you what we could tell you. Of course, whenever we had to take actions, we took actions in terms of remediation like I guess everybody in the industry has been doing. The reform of the LIBOR is a far-reaching not only industry. I think it's a regulatory and a political discussion, and I think that if asked, we will contribute to this debate. And -- but at this stage, we don't have any official position or stance. It's difficult to interject ourselves into this kind of discussion at this stage. And I missed the last part of the question.

Thomas Naratil

I think, Yasmin, you had a question on Glass-Steagall type reforms in Europe.

Sergio P. Ermotti

Well, look, I -- let's say, that's a -- diplomatically speaking, I would say that I fully understand why the debate is there, but there is no correlation between Glass-Steagall and what happened in the last 10 years or the problems that many banks had, had nothing to do with a separation between activities, let's call it commercial bank or Investment Bank. You can go all over the place from the U.S. into Europe, in any country, you will see that the problems were not necessarily driven by the combination of a universal bank model. So I don't believe that this is the resolution of the problem. Sounds nice, it's way too nice. I don't think that anything -- you cannot just basically go back with the clock and try to pretend that what we had 20 years ago is going to work. We have to adapt our business model, learn the lessons. I think the regulatory changes that had been implemented are going a long way to help to discipline the industry. There are some unintended consequences of those regulatory changes that we need to work through, but I do not believe that a Glass-Steagall is the solution of those problems. Now if -- I would like to move to the audience here in Zürich with any questions.

Teresa Nielsen - Bank Vontobel AG, Research Division

Teresa Nielsen from Bank Vontobel. Now that you have reached relatively comfortable levels of capital going toward your targets, would you say that you would have the capacity to do an acquisition if there was an acquisition coming up that would be interesting for you, more specifically in the private banking Wealth Management consolidation? And secondly, do you expect FINMA to come out with some discount to your 6% loss-absorbing capital over the next 6 months?

Sergio P. Ermotti

I think that in terms of priority right now, we are very focused on executing our plans and not to go through into acquisition that would be diverting us from this strategy. Of course, as I mentioned in the past, I think it would be strategically wrong and quite arrogant by the leader in the industry to say that we are not watching at what's happening in terms of consolidation in the industry. If that happened, has to be part of our declare strategy and core strategy, has to be financially attractive and accretive very quickly. And if that happened, yes, we may have a look, but this is no compromise or substitution for any delay in achieving our target capitals or implementing also a return of capital to our shareholders. So in essence, we are saying yes, we have to watch. We have to see what's going on, but this cannot be something that goes against our declared targets. And in terms of FINMA, I think that our assumption right now is very clearly the one that we assume that we have to build up the full 6%. And as we develop our framework and our resolution framework, our new structure and our new business plan and we demonstrate our ability to be prudent in the way we manage the bank, we may be eligible for rebates. But our assumption at this stage is that we have to build it up fully, and then we will see what's happening. Next?

Unknown Analyst

Alexandra Rasdeu [ph] on behalf of Handelsblatt. I would like to stick to LIBOR, and I would like to ask you the question from what we have learned during the weekend, UBS is supposed to have played a key role in the LIBOR scandal. So I would like to have your comment on that. And second question, who's supervising this investigation within the bank? Is that you especially? Or is it Mr. Weber? And third question, you increased your provisions up to CHF 130 million from one quarter to the other. Does that have anything to do with the LIBOR scandal?

Sergio P. Ermotti

I think that we have been proactive in facing this issue of LIBOR and as we mentioned before, being upfront with the authorities and the regulators about this issue. That's the reason why we were able to apply for leniency in the areas where we had found evidence that one was necessary. It is crystal clear that UBS is not at the center of anything. So I don't think that -- there is no specific reason to point out that UBS is the sole bank. This is widely spoken. Many other banks are involved. We are waiting to see the results of the investigation, but there is no evidence at this stage that we have a particular position in that matter. All our investigations internally are run by our general counsel and together with audit, and we are also supported by external counsel. And we had an extensive review of millions of documents, and I think that we are -- at this stage, we are -- as I said before, we are waiting for the outcome of the investigation and in order to be able to assess the situation. In terms of provisions, well, Tom, you want to go on, on the provisions overall?

Thomas Naratil

Sure. Alexandra [ph], you correctly noted the change in balances under the litigation and regulatory section for the quarter-over-quarter change. When we provision each quarter, we review the list of matters that we have, go through our analysis of whether those matters are estimable or probable and make our judgments on what the provision should be in that -- for that particular quarter. And as we have done in every other quarter, we've provisioned appropriately for all matters that we've reviewed.

Unknown Analyst

Lucas Alsik [ph], and I have 3 questions. The first one, is it fair to say this is a disappointing quarter just if you have a look at your costs? Second one, is it fair to say that the Facebook incident is kind of stupidity that shouldn't happen to a bank like yours? And the third one is you're talking about reducing risks, have a look at your value at risk that exploded significantly. How can you say that everything is okay with the risk if the value at risk is rising?

Sergio P. Ermotti

Well, I think that is -- I would describe our results as a mixed bag. I think that if I look at our strategic objectives, reinforcing our capital base, the declared objective of 2012 was to strengthen our capital base. We are best in class, very solid capital base, very solid liquidity and funding position. And I think this is giving a lot of confidence to our clients, and that's the reason why you see net new money inflows coming in. I totally disagree with you on your assessment of disappointing being driven by cost, because our cost base is down CHF 1.1 billion year-on-year despite CHF 200 million of headwinds coming from the dollar. So therefore, if I look at that one as a second priority, so capital, one, cost the second, we are fully on track with our declared plan. Those are facts. I mean opinions are opinions, facts are facts, CHF 1.1 billion over the CHF 2 billion. And as I said before, we are still working on ways to further adapt our cost base to the new environment. So we are not complacent both short and long term. When we look at the risk side of the equation, I think that you look at -- I go to the third question and then I go back into the second one. In my recollection, I think our VaR went down by 50% year-on-year. So I think that we were around CHF 64 million a year ago, right?

Thomas Naratil

If we look, it's actually -- if you look at the quarter-on-quarter change, the end of period went from CHF 45 million to CHF 32 million. There was a spike in the mid-quarter related to Facebook which you may be noticing. But if you look at the table on Page 57, I think you'd see outside of that effect, it was reduced during the quarter.

Sergio P. Ermotti

But if you look at VaR year-on-year, it's down from CHF 64 million to CHF 32 million. So it's a very big reduction if you look at the revenues and the outcome, so I think there is no reason that behind having taking down risk-weighted assets, which is not the only proxy for risk we are aware. If you look at VaR, it's down by 50%. So I have no evidence supporting that statement. I would say also that when I look at our -- going back to your disappointing, I think the service quality we are offering to our clients are recognized, so we are making good progress. So on that sense, I would say the glass is half full. Of course, can I tell you that we are totally happy with those results? No, we are not happy. Of course, CHF 350 million missing to the bottom line, the factor due to Facebook, is a disappointing environment. I think -- I leave it up to you to describe if this is stupidity, but I can only tell you that we feel that this was a big mishandling by NASDAQ and not a fault of UBS. And therefore, if you want to apply the stupidity, I don't think it should be applied to UBS. But as I said before, we cannot stay here and say that those are great results, but the results have to be somehow related to the environment we are in. Our policy is not to force clients to take unnecessary risk just to make our bottom line. We have a long-term horizon, and we do think our investment in supporting our clients in these difficult markets will pay off over time. That's where we stand.

Sergio P. Ermotti

I have another 3 minutes for questions and then...

Unknown Analyst

Daniel Glett [ph], cash.th [ph]. I'd like to stick to the Facebook loss. The loss is quite considerable. According to the Swiss disclosure rules and the ad hoc perpetration rules, shouldn't you have disclosed the loss in May at -- in May and not now? I mean the reaction of the stock exchange was quite considerable today at 6.

Sergio P. Ermotti

I'll let Tom go through the answer on why we assess this in a different way.

Thomas Naratil

Yes. Thanks, Daniel, for your question. In term of assessing the ad hoc disclosure requirements, there are roughly a few points that we went through each day during the matter. The first one was whether or not the event would have caused UBS to show a loss for the quarter. The answer to that, each and every day during the time period that we were exposed to the stock was 0. The second was whether or not the event would have caused a material degradation of our capital ratios. The answer to that was no. The third factor that we considered was whether or not the event would have caused a material impact on our ability to continue to execute our strategy as outlined at Investor Day. The answer to that was no. And then finally, at no point was the loss ever greater than 1% of our shareholders' equity. So based on that sort of assessment of the facts, an ad hoc release was not required.

Sergio P. Ermotti

Okay. Just last question, if any. Over there.

Unknown Analyst

Storm [ph] from Kepler Capital Markets. I have 2 question. One is a very general one. The other one is just a little bit more detail please on money flows. Whilst I think we all acknowledge your net new money numbers do look very impressive, could you shed a bit more light again maybe on the geographical makeup? And is it also fair to say that the continuous margin decline we've seen in the Wealth Management organization over recent quarters is also a reflection of the margin differentials geographically, which this business offers? Tom, if I heard correctly, before, you said Swiss outflows have slowed. To what extent might that have been helped by industry consolidations? And I'm thinking about Claredon [ph] or Saracen [ph]. I don't know whether that played an element into that, and so just the Wealth Management and the money flow aspect. And the general question is, one, maybe for Sergio, what's your biggest concern at the moment, you would say, but meant UBS specific? So if we try and abstract from any Eurozone sovereign debt issues macro aspects, just UBS specific, is there anything that keeps you awake at night?

Sergio P. Ermotti

Well, let me tackle the last question. I think that from our standpoint of view, I think that there are many challenges right now other than Eurozone growth in the future. I think that's -- I think that we are, together with my colleagues -- and we are quite confident in our ability to control our future. I think that's -- I think that we -- what we want to demonstrate is our ability to consistently execute on our plan and our priorities. Building up and strengthening our capital position and adapting our cost base short term and long term is our top priorities. Of course, if you really ask me what I think I would be concerned is something that I cannot control, is a geopolitical event. A geopolitical event right now coming on top of everything that goes on in terms of the economic environment would be quite destructive. That's the reason why we are really paranoid to be strong in capital, strong with liquidity, strong with funding, because we want to be able to respond to this challenge and potentially, to take advantage of the situation. So -- but I'm afraid that things that really bothers me right now are not in my control.

Thomas Naratil

Yes. On your question on the combination of net new money and margin. The first thing -- I mean, I'd refer you to Slide 12 in the pack, which gives the breakdown by the business areas. Where we actually saw the outflows slow was in Europe. In Switzerland, we've had 2 quarters in a row of very good net new money. And I think that whether you look at a double-digit growth rate in net new money in Asia Pacific, 8% emerging markets, what we see is recapture of share of wallet in Switzerland. We actually think it's primarily being driven by our capital position and the strategy we're executing, in particular in the troubled environment that people see around Europe. And we think UBS is a safe refuge, and that's what clients are reflecting. In terms of the margin, I think it's also that same thing. I think it's the macro environment around Europe that's affecting that more than anything else. As Sergio covered in his slide, clients are frozen and paralyzed. If we could just see an environment where they move to conservative, we think we'd see a quick and substantial improvement at least to the bottom end of our range.

Sergio P. Ermotti

Good. Many thanks for attending these Q2 results, and we'll see you in 3 months' time. Thank you.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility and thank you all for participating in the conference. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.